The direct benefit for Kazia Therapeutics Limited (ASX:KZA), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is KZA will have to adhere to stricter debt covenants and have less financial flexibility. While KZA has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
See our latest analysis for Kazia Therapeutics
Is KZA right in choosing financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. Either KZA does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. Opposite to the high growth we were expecting, KZA’s negative revenue growth of -59% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does KZA’s liquid assets cover its short-term commitments?
Since Kazia Therapeutics doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of AU$2.4m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.63x. Having said that, a ratio greater than 3x may be considered high by some.
Next Steps:
As a high-growth company, it may be beneficial for KZA to have some financial flexibility, hence zero-debt. Since there is also no concerns around KZA’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, KZA’s financial situation may change. I admit this is a fairly basic analysis for KZA’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Kazia Therapeutics to get a better picture of the stock by looking at: